Key Operating Indicators
Sep 15, 2008
How does a company monitor and measure its financial goals and performance? Generally the answer to this question is through its financial statements. However, monthly financial statements are not enough once your business becomes large in size. There is too much going on within the business that impacts cash and will need to be tracked and watched. Hence, the use of key operating indicators. Over the years we have learned that companies that do not use them are generally in trouble.
What is a key operating indicator? A key operating indicator (KOI) is a measurement that allows you to evaluate whether you are meeting certain goals or criteria. KOIs should be the key factors that will ensure the success of your company. These numbers will be compared to budgets and/or industry standards.
How do you pick key operating indicators? Key operating indicators will be different for the most part from company to company. Usually KOIs revolve around company goals and plans. Examples of KOIs would be daily production units, scrap units, units sold, inventory turns, day sales outstanding, etc. KOIs should be specific, measurable, timely, and easy to read and understand.
How can KOIs be used to improve efficiency? KOIs are used in many companies to evaluate and improve efficiency, which will ultimately generate more cash and profits. The nursery industry for example uses KOIs to monitor crop production. How long will it take to make containers of plants? How much material was used to make a container? The nursery industry knows what needs to be accomplished to meet its goals and it has identified metrics to make sure it happens.
When should a company monitor KOIs? The urgency and magnitude of the metrics will determine how often you look at indicators. Some KOIs will need to be reviewed daily and others weekly. If your business is strapped for cash and you have pressure from your lenders or investors, you will need to look at them more frequently. It is never a bad idea to have a daily report to scan that shows you where you are, i.e., A/R, sales, cash, A/P, inventory dollars on hand, production statistics.
Who generates key operating reports? Generally information is sent to a designated person in accounting who compiles and reviews the data for reasonableness before being distributed. However, it can be done by various individuals as long as the information is done timely and accurately.
How long do we keep key operating indicators? There is no set time frame to keep KOIs. However, the longer the better, as they will provide historical trends to go back and refer to. It will also be helpful to look at a KOI when there has been a change in the business operations or processes. It is nice to go back and see if the changes being made had a positive or negative impact.
Do small companies need KOIs? All companies need KOIs. While they may not have as many, it is critical for early stage companies to monitor their progress. Cash, payroll, inventory are some of the standard ones small companies need to watch. Especially cash!
Should KOIs be changed? It is a good idea to review KOIs on an annual basis. However, if there is something new to be added or if a KOI that does not make sense then make the change as deemed necessary. Remember, the purpose is to use KOIs as a management tool. They need to be relevant and useful to monitor and obtain certain goals. They must be looked at by management and more importantly, action must be done if a KOI is out of balance.